2012 PERFORMANCE HIGHLIGHTS

Transcription

1 EL PASO ELECTRIC 2012

2 YOU POWER PROGRESS

3 DEAR SHARE HOLDERS: 2012 was a year marked by both change and progress for El Paso Electric ( EE or the Company ), as well as sadness over the death of our Chairman of the Board and good friend Kenneth Heitz, who passed away in July. Michael Parks, who previously served as Vice Chairman of the Board, transitioned to the chairmanship. At the 2012 annual meeting, Tom Shockley became our new Chief Executive Officer after serving on the Company s Board of Directors for several years. Tom has more than 30 years of experience in the electric utility industry and, in 2004, retired as Vice Chairman and Chief Operating Officer of American Electric Power Inc. In terms of progress, EE is fortunate to be part of vibrant and growing communities in Far West Texas and Southern New Mexico. To provide for this continuing growth and development, and the planned retirement of obsolete generating units, the Company expects to invest $1.2 billion in capital projects over the next five years. Those projects include a new power plant site in Far East El Paso, our first new generation site within our service territory in more than 50 years. These investments highlight EE s commitment to partnering with our communities to promote growth while providing safe, clean, affordable and reliable energy, along with the highest level of customer service. Some of the most significant accomplishments of 2012 include Being recognized as the most reliable investor-owned utility in Texas based on reliability indices compiled by the Public Utility Commission of Texas (PUCT) Entering into consensual settlement of a rate case in Texas for the benefit of our customers and the Company, which also allowed us to better work with the City of El Paso to promote economic development Moving forward with economic-development initiatives to spur growth across our service territory Adding 22 megawatts of solar capacity, making EE among the top utilities in the nation on a solar-energyper-customer basis Beginning construction on a $93 million local naturalgas generation unit Adding two new Board members, both from within our El Paso service territory, augmenting the experience and expertise of our Board All of this was accomplished while maintaining one of the lowest carbon footprints of any utility in the country and continuing our partnership with the communities we serve through financial contributions and the incredible volunteer efforts of our employees. Prior to his death last year, former Chairman of the Board Kenneth Heitz served as a dedicated director of the Company for 17 years. During his tenure on the Board, the Company delivered a six-fold increase in its stock price; completely refinanced its capital structure, returning the Company to financial health; emerged from a 15-year rate freeze and established regulated rates in Texas and New Mexico; and began a capital construction program that will result in capital expenditures of $1.2 billion over the next five years to power the region s future. In honor of Mr. Heitz s commitment to education and his leadership and dedication to our community, EE is creating two scholarship endowments for students of electrical engineering, one at New Mexico State University and one at the University of Texas at El Paso. Michael K. Parks, who worked closely with Mr. Heitz during their 17 years together on the Board, was elected Chairman of the Board in July. Like Mr. Heitz, Mr. Parks has served on the EE Board since 1996, most recently as Vice Chairman. In 2012, the Board elected two new directors, Edward Escudero and Woodley Woody L. Hunt. The addition of these two highly qualified directors brings vast additional knowledge and experience to the Board and the Company. Both are respected leaders in the city of El Paso and have deep roots, vast experience, and a history of public service in our communities. Mr. Escudero is a CPA and President and Chief Executive Officer of High Desert Capital LLC, a finance company that specializes in providing capital alternatives to small and mid-size companies. He previously served as Chairman of the Board of El Paso s water utility, the Public Service Board. Mr. Hunt is Chairman and Chief Executive Officer of Hunt Companies Inc. and its affiliated companies. Founded in 1947, the privately owned Hunt Companies is a leading national real estate investment, management and development firm. Mr. Hunt s focus and experience includes public-private partnerships, community development, real-asset investment management, and multifamily housing. Mr. Hunt previously served on the Board of PNM Resources Inc. in Albuquerque, New Mexico. These additions complement the extraordinary team of 985 EE employees who live and work in our service territory. Their dedication and commitment is unparalleled. This was evident in late October, when volunteers offered their services to assist with the restoration efforts necessitated by Hurricane Sandy. Twenty-nine Company volunteers travelled to New York and worked long hours, under difficult conditions, to speed the restoration of electric service. The Edison Electric Institute honored EE employees for this effort with its 2012 Emergency

4 Assistance Award. December 2012 also marked the Company s 10th anniversary of its listing on the New York Stock Exchange, and we were honored to have one of our Hurricane Sandy volunteers ring the opening bell at the exchange. At home, our employees work earned EE the highest 2012 rankings for investor-owned utilities in Texas for the System Average Interruption Duration Index (SAIDI) and the System Average Interruption Frequency Index (SAIFI), which are reliability indices compiled by the Public Utility Commission of Texas. At all levels, the skill and commitment needed to achieve our vision of providing safe, clean, affordable and reliable energy through superior production, acquisition and delivery is evident on a daily basis. The entire EE team is ready and working to meet the growing needs of our region. We are working together to create new opportunities and take advantage of our unique position in serving two states along the U.S.- Mexico border and several major military bases, including Fort Bliss. EE is working with our partners at local and state levels to ensure that we are prepared to provide the services they want and need as our economy grows. While 2012 started off with the filing of a rate case in Texas, we were able to reach a settlement with the parties that has proved to have numerous positive outcomes, including a new rider that supports the region s economicdevelopment efforts. It also created an environment for EE to increase its communications with local and state officials. This environment has resulted in multiple new opportunities for discussion and cooperation regarding future development, necessary investments, and the requirements for future rate cases, as well as greater project coordination, which ultimately leads to cost savings for all parties. These developments are extremely important, as EE is investing $1.2 billion in capital projects over the next five years. These projects are being carefully planned to align with the energy needs of our communities, while limiting our carbon footprint and incorporating renewable energy into EE s portfolio. In January, EE broke ground on an addition to local power generation station Rio Grande Nine. This $93 million investment (including allowance for funds used during construction) is expected to generate 87 MW of electricity, enough to power approximately 37,000 homes. The natural-gas-fueled aeroderivative turbine, GE s LMS-100, offers peaking capability, which will enhance the efficiencies of EE s generation as the Company adds renewable-energy sources. This peaking capability will also accommodate the region s significant load variations. Our cash capital construction program includes the planned addition of four additional LMS- 100 units to be built at a new power station in Far East El Paso County, the Montana Power Station. The plan calls for one unit per year to be placed into service from 2014 to Approximately $298 million, including $62 million of common costs, is projected to be spent on cash construction at the new Montana Power Station through Construction will commence once all permits are secured. Our cash capital construction plan through 2017 also includes approximately $17 million for the initial construction of a combined-cycle unit (288 MW), which is scheduled to be commercially operable in In addition, the plan includes $166 million for the Palo Verde Nuclear Generating Station, $488 million for transmission and distribution expenditures to connect new generation and serve our expanding customer base, and $140 million for general capital expenditures through Approximately $42 million of general capital expenditures is earmarked for the construction of two new distribution service centers on the east and west sides of El Paso, which will serve to consolidate many current operations and increase efficiency. Currently, EE expects to need to file a request to increase rates in Texas in the second quarter of The anticipated need for rate recovery is necessitated predominantly by investments in Rio Grande Unit Nine and Montana Power Station Unit 1, which are scheduled to be commercially operable in May 2013 and November 2014, respectively. As noted above, the new generation units are fueled by natural gas. These clean and efficient units, combined

5 with our existing generation portfolio, place EE among the leaders in clean energy by maintaining one of the lowest carbon footprints for a generating utility in the country. In addition, this new technology allows us to continue to add solar generation to our system. In 2012, EE continued its commitment to support and develop solar-energy resources in our service territory. These projects not only provide a more diversified generation portfolio, but also support research and education in solar-energy utilization. We partnered with El Paso Community College (EPCC) to fund the installation of solar panels that can generate up to 19 kw of electricity while being used in EPCC s renewable-energy education curriculum. EE and SunEdison, a leading worldwide solar-energy services provider, collaborated on two solar facilities built in Southern New Mexico, with capacities of 12 MW and 10 MW. These projects are made possible through a power-purchase agreement between EE and SunEdison, under which SunEdison built and operates the facilities, and EE purchases all power generated by the stations. Also in 2012, EE added the 31 kw Stanton Tower Solar Installation. The installation is on the roof of EE s corporate headquarters in Downtown El Paso. Finally, in November, EE announced the execution of a power-purchase agreement with Element Power for the total output from the Macho Springs Solar Project, a 50 MW solar photovoltaic power station to be built near Deming, New Mexico, on land leased from the New Mexico State Land Office. When completed, this project will be the largest solar project in the state of New Mexico. EE selected this project from a competitive all-sources power request for proposals. The project s output will provide electricity to our customers at a competitive rate and enhance EE s increasing renewable-energy portfolio. EE continues to evaluate opportunities to participate in additional projects to expand its renewable-energy portfolio. With the addition of the Macho Springs Solar Project, renewable-energy projects both owned and purchased by EE will represent 5 percent of our netdependable generating capacity. This represents one of the largest percentages of renewable energy for a utility company in the United States. Financially, as expected, due in part to the Texas rate settlement and a return to normal weather in 2012 (2011 was one of the hottest years on record, with 50 days of triple-digit temperatures), earnings declined from $2.49 per basic share in 2011 to $2.27 per basic share in Thomas V. Shockley III Chief Executive Officer These results represent strong operating performance and are in line with expectations. Consistent with the decline of the S&P 500 Electric Utilities Index and the S&P 500 Utility Index, the Company s total shareholder return and stock price declined slightly as well. We are pleased, nonetheless, with the overall return provided to shareholders, with EE s stock price having appreciated at a compound annual growth rate of 16.3 percent since EE continued paying a quarterly cash dividend on common stock in 2012, distributing a total of $38.9 million in cash dividends in The Company increased its quarterly cash dividend by 13.6 percent to an annual rate of $1.00 per share (from $0.88 per share) in the second quarter of 2012, its first increase since EE re-instituted a common stock dividend in EE will continue to evaluate all aspects of the current cash-dividend policy. In 2012, EE refinanced pollution-control bonds, saving interest and insurance expenses, and issued $150 million of 10-year unsecured senior notes at a coupon rate of 3.3 percent. The savings and proceeds should provide appropriate liquidity and flexibility to fund our planned capital construction program for the next 12 months. Finally, EE employees continued their commitment to our communities, not only by serving customers but also by contributing their time and efforts assisting nonprofit organizations through volunteering. In 2012, EE employees contributed more than 13,000 hours of volunteer work in the El Paso/Las Cruces area. In addition, EE continued its commitment to supporting cultural, educational and quality-of-life programs and events that contribute to the growth and development of our region. We look forward to a busy 2013 as we continue working with our communities and providing sufficient safe, clean, affordable and reliable energy to meet their needs. We are excited about the potential that lies ahead for EE and the region it serves, and we are looking forward to a bright future. We thank our shareholders and all our stakeholders for their continued support, and we are confident that we are enhancing value. Michael K. Parks Chairman of the Board 2012 PERFORMANCE HIGHLIGHTS FINANCIAL ($000) Operating Revenues Retail Non-Fuel Base Revenues Deregulated Palo Verde Unit 3 Proxy Market Pricing Off-System Sales Gross Margins Retained Margins Net Income (before extraordinary item) Total Assets COMMON STOCK DATA Earnings Per Share (income before extraordinary item) (diluted weighted average) Market Price Per Share (year-end close) Book Value Per Share Common Stock Equity Shares Outstanding at End of Year Weighted Average Number of Shares & Dilutive Potential Shares Outstanding Number of Registered Holders as of 12/31 $ 90,317 (a) $ 2,364,766 (a) 2010 earnings include a one-time noncash charge of $4.8 million or $0.11 per share related to recognizing a change in the tax law included in the health-reform legislation, which eliminated the tax benefit of Medicare Part D subsidies $ 536,309 $ 16,103 $ 11,801 $ 5,687 $ 2.07 $ $ $ 810,375 42,571,065 43,294,419 3, $ 569,956 $ 14,820 $ 3,323 $ (560) $ 103,539 $ 2,396,851 $ 2.48 $ $ $ 760,251 39,959,154 41,587,059 3, $ 560,282 $ 9,848 $ 10,289 $ 1,098 $ 90,846 $ 2,669,050 $ 2.26 $ $ $ 824,999 40,112,078 40,055,581 2,767

6 2012 OPERATIONAL HIGHLIGHTS 2012 OPERATIONAL HIGHLIGHTS COMMON STOCK EQUITY (percent of capitalization) MARKET PRICE PER SHARE (end of year) ANNUAL VALUE OF SHARE REPURCHASES AND DIVIDENDS (a) RESIDENTIAL CUSTOMERS AND USAGE PER CUSTOMER GROWTH % % % % % 2012 $ $ $ $ $18.09 (a) EE initiated a quarterly cash dividend in 2011, distributing a total of $27.2 million in 2011 and $38.9 million during $38, $113, $33, $24, $9,892 NUMBER OF CUSTOMERS 360, , , ,000 6,955 7,244 7,560 7,641 7,767 USAGE PER CUSTOMER (kwh) 8,000 7,500 7,000 6,500 6,000 TOTAL SHAREHOLDER RETURN 12/31/07 12/31/12 Five-Year Cumulative Comparison 280, ,000 5,500 5,000 $150 $130 $ , ,000 4,500 4,000 3,500 $110 $90 $109 $102 $95 200, * ,000 Residential customers at end of year Avg annual kwh use per residential customer $70 *2011 residential customer usage is weather normalized. $50 $30 Dec. 31, 2007 EE $100 S&P 500 Utilities $100 S&P 500 Electric $100 S&P 500 $100 EE Dec. 31, 2008 $71 $71 $74 $63 S&P 500 Utilities Dec. 31, 2009 $79 $79 $77 $80 Dec. 31, 2010 $108 $84 $79 $92 S&P 500 Electric Dec. 31, 2011 $137 $101 $96 $94 S&P 500 Dec. 31, 2012 $130 $102 $95 $109 OPERATIONAL Retail GWh Sold % Change Native Peak (MW) , % 1, , % 1, , % 1,688 PALO VERDE CAPACITY FACTOR % % % Assumes $100 was invested in El Paso Electric Company common stock and each index listed above on December 31, 2007, and assumes that all dividends were reinvested. Customers at Year-End % Change 376, % 380, % 384, % % % Employees at Year-End RETAIL NON-FUEL BASE OPERATING REVENUES 2012 RETAIL MWH SALES Residential 42% Residential 34% Commercial & Ind. Small 34% Commercial & Ind. Small 31% GENERATING CAPACITY Commercial & Ind. Large 7% Commercial & Ind. Large 14% Plant Net Dependable Generating Capability Fuel Source Energy Mix Sales to Public Authorities 17% Sales to Public Authorities 21% Palo Verde 633 MW Nuclear 46% Newman 732 MW Natural Gas CONSTRUCTION COST ESTIMATES (in millions) Rio Grande Copper 229 MW 62 MW Natural Gas Natural Gas 32% Production $572 (1) (2) Four Corners 108 MW Coal 6% Transmission $176 Purchased Power 16% Distribution $312 Hueco Mountain Wind Ranch 1 MW Wind General $140 Total $1,200 Total 1,765 MW 100% (1) Does not include acquisition costs for nuclear fuel. (2) Includes $325 million for new generating capacity, including $10 million to complete Rio Grande Unit 9 in Included in this amount is $98 million to complete construction of two 88 MW gas-fired LMS-100 units that are scheduled to come online in 2014 and 2015, and $138 million for two additional 88 MW LMS-100 units scheduled to come online in 2016 and In addition, $62 million of common costs associated with the development of the new Montana Power Station and $17 million of initial expenditures for a combined-cycle unit scheduled to come online in 2021 are included in this amount.

7 OPERATING STATISTICS Operating Revenues (in thousands): Non-Fuel Base Revenues: Retail: Residential Commercial and Industrial, Small Commercial and Industrial, Large Sales to Public Authorities Total Retail Base Revenues $234, ,014 42,041 96, ,282 $234, ,093 45,407 94, ,956 $217, ,390 43,844 86, ,309 $195, ,328 34,804 77, ,300 $184, ,593 36,318 74, ,138 $184, ,091 39,092 72, ,508 $175, ,359 40,502 68, ,940 $173, ,406 39,192 65, ,466 $164, ,188 41,096 65, ,426 $161, ,869 41,402 65, ,953 Wholesale: Sales for Resale Total Non-Fuel Base Revenues 2, ,600 2, ,078 1, ,252 2, ,337 1, ,784 1, ,427 1, ,734 1, ,153 1, ,101 3, ,176 Fuel Revenues: Recovered from Customers During the Period Under (Over) Collection of Fuel New Mexico Fuel in Base Rates Total Fuel Revenues 130,193 (18,539) 74, , ,130 13,917 73, , ,588 (35,408) 71, , ,081 (66,608) 69, , ,292 42,752 68, , ,383 17,828 51, , ,441 (3,655) 30, , ,500 79,539 29, , ,692 17,360 27, , ,956 (13,195) 27, ,131 Off-System (Economy) Sales: Fuel Cost Shared Margins Retained Margins Total Off-System (Economy) Sales Other Total Operating Revenues 62,481 9,191 1,098 72,770 31,703 $852,881 74,736 3,883 (560) 78,059 35,375 $918,013 93,516 6,114 5, ,317 26,626 $877, ,665 3,596 10, ,064 28,096 $827, ,021 7,342 22, ,500 24,971 $1,038, ,393 4,067 15, ,974 18,328 $877,427 73,331 4,340 18,261 95,932 20,970 $816,455 57,943 6,516 13,750 78,209 14,072 $803,913 57,268 8,250 13,015 78,533 10,986 $708,628 53,918 8,760 13,858 76,536 8,519 $664,362 Number of Customers (end of year): Residential Commercial and Industrial, Small Commercial and Industrial, Large Other Total 341,682 37, , , ,659 37, , , ,729 37, , , ,553 36, , , ,618 35, , , ,091 35, , , ,923 32, , , ,031 31, , , ,435 31, , , ,179 30, , ,020 Average Annual kwh Use Per Residential Customer 7,767 7,832 7,560 7,244 6,955 7,085 6,852 6,936 6,769 6,761 Energy Supply, MWh: Generated Purchased and Interchanged Total Energy Supplied 9,261,643 1,768,810 11,030,453 8,936,776 2,135,124 11,071,900 8,465,659 2,420,869 10,886,528 7,979,290 2,745,500 10,724,790 8,023,475 3,152,396 11,175,871 7,707,095 2,188,904 9,895,999 6,908,006 2,208,661 9,116,667 7,500,144 1,255,626 8,755,770 7,611,455 1,410,114 9,021,569 7,740,923 1,250,707 8,991,630 Energy Sales, MWh: Retail: Residential Commercial and Industrial, Small Commercial and Industrial, Large Sales to Public Authorities Total Retail 2,648,348 2,366,541 1,082,973 1,617,606 7,715,468 2,633,390 2,352,218 1,096,040 1,579,565 7,661,213 2,508,834 2,295,537 1,087,413 1,542,389 7,434,173 2,361,650 2,251,399 1,024,186 1,482,448 7,119,683 2,227,838 2,255,585 1,102,277 1,448,654 7,034,354 2,232,668 2,216,428 1,195,038 1,384,380 7,028,514 2,113,733 2,159,599 1,204,707 1,343,129 6,821,168 2,090,098 2,126,918 1,165,506 1,270,116 6,652,638 1,986,085 2,115,822 1,236,426 1,243,003 6,581,336 1,932,171 2,096,860 1,197,065 1,224,349 6,450,445 Wholesale: Sales for Resale Off-System (Economy) Sales Total Wholesale Total Energy Sales Losses and Company Use Total, Net 64,266 2,614,132 2,678,398 10,393, ,587 11,030,453 62,656 2,687,631 2,750,287 10,411, ,400 11,071,900 53,637 2,822,732 2,876,369 10,310, ,986 10,886,528 56,931 2,995,984 3,052,915 10,172, ,192 10,724,790 50,148 3,506,770 3,556,918 10,591, ,599 11,175,871 48,290 2,201,294 2,249,584 9,278, ,901 9,895,999 45,397 1,635,407 1,680,804 8,501, ,695 9,116,667 41,883 1,420,778 1,462,661 8,115, ,471 8,755,770 41,094 1,838,467 1,879,561 8,460, ,672 9,021,569 67,754 1,920,882 1,988,636 8,439, ,549 8,991,630 Native System: Peak Load, MW Net Dependable Generating Capability for Peak, MW 1,688 1,765 1,714 1,785 1,616 1,643 1,571 1,643 1,524 1,503 1,508 1,492 1,428 1,492 1,376 1,479 1,332 1,472 1,308 1,459 Total System: Peak Load, MW Net Dependable Generating Capability for Peak, MW 1,979 1,765 1,967 1,785 1,889 1,643 1,723 1,643 1,669 1,503 1,680 1,492 1,675 1,492 1,628 1,479 1,575 1,472 1,546 1,459

8 BOARD OF DIRECTORS INVESTOR RELATIONS Michael K. Parks Chairman of the Board Managing Director Crescent Capital Group, LP Los Angeles, CA Catherine A. Allen Chairman and Chief Executive Officer The Santa Fe Group Santa Fe, NM J. Robert Brown Owner and President Brownco Capital, LLC El Paso, TX James W. Cicconi Senior Executive Vice President External and Legislative Affairs AT&T Washington, D.C. Edward Escudero President and Chief Executive Officer High Desert Capital, LLC El Paso, TX OFFICERS James W. Harris Founder and President Seneca Financial Group, Inc. Manns Harbor, NC Patricia Z. Holland-Branch Chief Executive Officer and Owner The Facilities Connection, Inc. El Paso, TX Woodley L. Hunt Chairman and Chief Executive Officer Hunt Companies, Inc. El Paso, TX Thomas V. Shockley III Chief Executive Officer El Paso Electric Company El Paso, TX Eric B. Siegel Retired Limited Partner of Apollo Advisors, LP Consultant and Special Advisor to the Chairman of the Milwaukee Brewers Baseball Club Los Angeles, CA Stephen N. Wertheimer Managing Director and Founding Partner W Capital Partners New York, NY Charles A. Yamarone Director Houlihan Lokey Los Angeles, CA Securities and Records The common stock of El Paso Electric is traded on the New York Stock Exchange. The ticker symbol is EE. EE and Computershare Shareowner Services act as co-registrars for EE s common stock. Computershare Shareowner Services maintains all shareholder records of EE. Form 10-K Report and Shareholder Inquiries A complete copy of EE s Annual Report and Form 10-K for the year ending December 31, 2012, which has been filed with the Securities and Exchange Commission, including financial statements and financial statement schedules, is available without charge upon written request to: Investor Relations El Paso Electric P.O. Box 982 El Paso, TX Call: (800) investor_relations@epelectric.com Website: Shareowner Services Shareholders may obtain information relating to their share position, transfer requirements, lost certificates and other related matters by contacting Computershare Shareowner Services at (866) (inside the United States and Canada), (201) (outside the United States and Canada), or (800) (TDD) for the hearing impaired. The phone service is available to all shareholders Monday through Friday, 8 a.m. to 8 p.m., EST. Website: Address shareowner inquiries to: El Paso Electric Company C/O Computershare P.O. Box Providence, RI Thomas V. Shockley III Chief Executive Officer David G. Carpenter Senior Vice President Chief Financial Officer Mary E. Kipp Senior Vice President General Counsel Chief Compliance Officer Rocky R. Miracle Senior Vice President Corporate Planning and Development Hector R. Puente Senior Vice President Chief Operations Officer Steven T. Buraczyk Vice President Power Marketing and Fuels Resource and Delivery Planning Steven P. Busser Vice President Treasurer Robert C. Doyle Vice President Transmission and Distribution System Operations and Planning Nathan T. Hirschi Vice President Controller Kerry B. Lore Vice President Customer Care Andres R. Ramirez Vice President Power Generation Guillermo Silva Jr. Corporate Secretary H. Wayne Soza Vice President Compliance Chief Risk Officer William A. Stiller Vice President Chief Human Resources Officer

9 SERVICE AREA New Mexico Hatch Las Cruces El Paso Four Corners, NM (400 miles) To Albuquerque, NM Ciudad Juárez Van Horn Texas To Springerville, AZ Holloman AFB Hatch Palo Verde, AZ (450 miles) White Sands Missile Range Amrad Eddy County, NM Interchange (125 miles) Arroyo Luna Las Cruces New Mexico Anthony Newman McGregor Range México Rio Grande Diablo Ascarate Caliente Copper To Dell City, TX Texas Ciudad Juárez Fabens Sierra Blanca Van Horn Company Lines Major Distribution Stations Generating Stations For the Company s forward-looking statements, please refer to page (iii) of the Annual Report on Form 10-K.

10 (Mark One) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission file number to El Paso Electric Company (Exact name of registrant as specified in its charter) Texas (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Stanton Tower, 100 North Stanton, El Paso, Texas (Address of principal executive offices) (Zip Code) Securities Registered Pursuant to Section 12(b) of the Act: YES YES Registrant s telephone number, including area code: (915) Title of each class Name of each exchange on which registered Common Stock, No Par Value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES As of June 30, 2012, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,313,087,454 (based on the closing price as quoted on the New York Stock Exchange on that date). As of January 31, 2013, there were 40,193,854 shares of the Company s no par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant s definitive Proxy Statement for the 2013 annual meeting of its shareholders are incorporated by reference into Part III of this report. NO

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12 DEFINITIONS The following abbreviations, acronyms or defined terms used in this report are defined below: Abbreviations, Acronyms or Defined Terms Terms ANPP Participation Agreement... APS... Arizona Public Service Company ASU... Accounting Standards Updates Company... El Paso Electric Company DOE... United States Department of Energy El Paso... City of El Paso, Texas FASB... Financial Accounting Standards Board Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended FERC... Federal Energy Regulatory Commission Fort Bliss... Fort Bliss the United States Army post next to El Paso, Texas Four Corners... Four Corners Generating Station kv... Kilovolt(s) kw... Kilowatt(s) kwh... Kilowatt-hour(s) Las Cruces... City of Las Cruces, New Mexico MW... Megawatt(s) MWh... Megawatt-hour(s) NERC... North American Electric Reliability Corporation NMPRC... New Mexico Public Regulation Commission Net dependable generating capability NRC... Nuclear Regulatory Commission Palo Verde... Palo Verde Nuclear Generating Station Palo Verde Participants... The maximum load net of plant operating requirements which a generating plant can supply under specified conditions for a given time interval, without exceeding approved limits of temperature and stress Those utilities who share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde pursuant to the ANPP Participation Agreement PNM... Public Service Company of New Mexico PUCT... Public Utility Commission of Texas RGEC... Rio Grande Electric Cooperative RGRT... Rio Grande Resources Trust TEP... Tucson Electric Power Company TNP... Texas-New Mexico Power Company (i)

13 TABLE OF CONTENTS Item Description Page PART I 1 Business A Risk Factors B Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations A Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure A Controls and Procedures B Other Information PART III PART IV (ii)

14 FORWARD-LOOKING STATEMENTS Certain matters discussed in this Annual Report on Form 10-K other than statements of historical information are forward-looking statements. The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we believe, anticipate, target, expect, pro forma, estimate, intend, "will", "is designed to", "plan" and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to, such things as: capital expenditures, earnings, liquidity and capital resources, ratemaking/regulatory matters, litigation, accounting matters, possible corporate restructurings, acquisitions and dispositions, compliance with debt and other restrictive covenants, interest rates and dividends, environmental matters, nuclear operations, and the overall economy of our service area. These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as: our ability to recover our costs and earn a reasonable rate of return on our invested capital through the rates that we charge, the ability of our operating partners to maintain plant operations and manage operation and maintenance costs at the Palo Verde and Four Corners plants, including costs to comply with any potential new or expanded regulatory or environmental requirements, reductions in output at generation plants operated by us, unscheduled outages including outages at Palo Verde, the size of our construction program and our ability to complete construction on budget and on a timely basis, disruptions in our transmission system, and in particular the lines that deliver power from our remote generating facilities, electric utility deregulation or re-regulation, regulated and competitive markets, ongoing municipal, state and federal activities, economic and capital market conditions, changes in accounting requirements and other accounting matters, changing weather trends and the impact of severe weather conditions, rates, cost recovery mechanisms and other regulatory matters including the ability to recover fuel costs on a timely basis, changes in environmental laws and regulations and the enforcement or interpretation thereof, including those related to air, water or greenhouse gas emissions or other environmental matters, cuts in military spending that reduce demand for our services from military customers, (iii)

15 political, legislative, judicial and regulatory developments, the impact of lawsuits filed against us, the impact of changes in interest rates, changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan and other postretirement plan assets, the impact of recent U.S. health care reform legislation, the impact of changing cost escalation and other assumptions on our nuclear decommissioning liability for Palo Verde, Texas, New Mexico and electric industry utility service reliability standards, homeland security considerations, including those associated with the U.S./Mexico border region, coal, uranium, natural gas, oil and wholesale electricity prices and availability, possible income tax and interest payments as a result of audit adjustments proposed by the IRS or state taxing authorities, and other circumstances affecting anticipated operations, sales and costs. These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings Risk Factors and Management s Discussion and Analysis Summary of Critical Accounting Policies and Estimates and Liquidity and Capital Resources. This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations. (iv)

16 PART I Item 1. Business General El Paso Electric Company (the "Company") is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves a full requirements wholesale customer in Texas. The Company owns or has significant ownership interests in six electrical generating facilities providing it with a net dependable generating capability of approximately 1,765 MW. For the year ended December 31, 2012, the Company s energy sources consisted of approximately 46% nuclear fuel, 32% natural gas, 6% coal, 16% purchased power and less than 1% generated by wind turbines. The Company serves approximately 384,000 residential, commercial, industrial, public authority and wholesale customers. The Company distributes electricity to retail customers principally in El Paso, Texas and Las Cruces, New Mexico (representing approximately 62% and 12%, respectively, of the Company s retail revenues for the year ended December 31, 2012). In addition, the Company s wholesale sales include sales for resale to other electric utilities and power marketers. Principal industrial, public authority and other large retail customers of the Company include United States military installations, including Fort Bliss in Texas and White Sands Missile Range and Holloman Air Force Base in New Mexico, oil refineries, two large universities, steel production and copper refining facilities. The Company s principal offices are located at the Stanton Tower, 100 North Stanton, El Paso, Texas (telephone ). The Company was incorporated in Texas in As of January 31, 2013, the Company had approximately 1,000 employees, 40% of whom are covered by a collective bargaining agreement. The Company makes available free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ( SEC ). In addition, copies of the annual report will be made available free of charge upon written request. The SEC also maintains an internet site that contains reports, proxy and information statements and other information for issuers that file electronically with the SEC. The address of that site is The information on the internet site is not incorporated into this document by reference. Facilities As of December 31, 2012, the Company s net dependable generating capability of 1,765 MW consists of the following: Company's Share of Net Dependable Generating Capability * (MW) Company Ownership Interest Primary Fuel Station Type Location Palo Verde Station Nuclear % Wintersburg, Arizona Newman Power Station Natural Gas % El Paso, Texas Rio Grande Power Station Natural Gas % Sunland Park, New Mexico Four Corners Station (Units 4 and 5) Coal 108 7% Fruitland, New Mexico Copper Power Station Natural Gas % El Paso, Texas Hueco Mountain Wind Ranch Wind 1 100% Hudspeth County, Texas Total 1,765 * During summer peak period. 1

17 Palo Verde Station The Company owns an interest, along with six other utilities, in the three nuclear generating units and common facilities ( Common Facilities ) at Palo Verde. Arizona Public Service Company ( APS ) serves as operating agent for Palo Verde, and under the ANPP Participation Agreement, the Company has limited ability to influence operations and costs at Palo Verde. License Extension. In 2011, the NRC renewed the operating licenses for all three units at Palo Verde. The renewed licenses for Units 1, 2 and 3 now expire in 2045, 2046 and 2047, respectively. Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, through the term of their respective operating licenses. In 2011, the Palo Verde Participants approved the 2010 Palo Verde decommissioning study (the 2010 Study ), which reflected the extension of the operating license, and estimated that the Company must fund approximately $357.4 million (stated in 2010 dollars) to cover its share of decommissioning costs. At December 31, 2013, the Company's decommissioning trust fund had a balance of $187.1 million. Although the 2010 Study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not increase in the future or that regulatory requirements will not change. Spent Fuel Storage. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the Waste Act ), the DOE is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive waste generated by all domestic power reactors, but to date has not done so. In 2003, APS, in conjunction with other nuclear plant operators, filed suit against the DOE on behalf of the Palo Verde Participants to recover monetary damages associated with the delay in the DOE s acceptance of spent fuel. In 2010, the court awarded APS and the other Palo Verde Participants approximately $30 million in damages, of which the Company received $4.8 million. On December 19, 2012, APS, acting on behalf of itself and the Palo Verde Participants, filed a second lawsuit against the DOE, seeking to recover damages incurred due to DOE's failure to accept Palo Verde's spent nuclear fuel for the period beginning January 1, 2007 through June 30, The DOE had planned to meet its disposal obligations through a permanent geologic repository at Yucca Mountain, Nevada. However, legal proceedings in a variety of jurisdictions, as well as regulatory challenges, have delayed the approval and implementation of this plan. The Company cannot predict when spent fuel shipments to the DOE will commence. APS and the Company believe that spent fuel storage or disposal methods will be available to allow each Palo Verde unit to continue to operate through the current term of its operating license, however the Company expects to incur significant costs for on-site spent fuel storage during the life of Palo Verde, which may be recoverable from the DOE. NRC Oversight of the Nuclear Energy Industry in the Wake of the Earthquake and Tsunami in Japan. The NRC regulates the operation of all commercial nuclear power reactors in the United States, including Palo Verde. The NRC periodically conducts inspections of nuclear facilities and monitors performance indicators to enable the agency to arrive at objective conclusions about a licensee's safety performance. Following the March 11, 2011 earthquake and tsunami in Japan, which caused significant damage to the Fukushima Daiichi Nuclear Power Station, the NRC launched a two-pronged review of U.S. nuclear power plant safety. With respect to Palo Verde, the NRC issued two orders requiring safety enhancements regarding: (1) mitigation strategies to respond to extreme natural events resulting in the loss of power at plants; and (2) enhancement of spent fuel pool instrumentation. The NRC has also requested information pertaining to re-evaluations of seismic and flooding hazards, communications, and staffing during events affecting multiple reactors at a site. Palo Verde has budgeted $14 million, total project, in modifications for the 2013 capital budget relating to the NRC requirements. Until further action is taken by the NRC as a result of this event, the Company cannot predict any additional financial or operational impacts on Palo Verde. Liability and Insurance Matters. The Palo Verde participants have insurance for public liability resulting from nuclear energy hazards, covered by primary liability insurance provided by commercial insurance carriers and an industry-wide retrospective assessment program. If a loss at a nuclear power plant covered by the programs exceeds the accumulated funds in the primary level of protection, the Company could be assessed retrospective premium adjustments on a per incident basis up to $55.7 million, with an annual payment limitation of approximately $8.3 million. The Palo Verde Participants also maintain all risk (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde. In addition, the Company has secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen outage at Palo Verde. 2

18 Fossil-Fueled Plants The Newman Power Station consists of three steam-electric generating units and two combined cycle generating units. In 2012 the net dependable capability at Newman Power Station was reduced by 20 MW to reflect the exclusion of the duct burners for dependable operation on the Newman Unit 4 combined cycle generating unit. The station operates primarily on natural gas but the conventional steam-electric generating units can also operate on fuel oil. The Company's Rio Grande Power Station consists of three steam-electric generating units which operate on natural gas. Construction has begun on Rio Grande Unit 9 to add an aeroderivative unit with a net dependable summer peak period generating capacity of 87 MW that should achieve commercial operation by May The Company owns a 7% interest in Units 4 and 5 at Four Corners. The Company shares power entitlements and certain allocated costs of the two units with APS (the Four Corners operating agent) and the other Four Corners participants. Four Corners is located on land under easements from the federal government and a lease from the Navajo Nation that expires in APS, on behalf of the Four Comers participants, negotiated amendments to the lease with the Navajo Nation which extended the lease from 2016 to 2041, pending the approval of the Department of the Interior and a Federal environmental review. The Company's Copper Power Station consists of a combustion turbine used primarily to meet peak demand. Hueco Mountain Wind Ranch The Company s Hueco Mountain Wind Ranch currently consists of two wind turbines with a total capacity of 1.32 MW of which a portion, currently 10%, is used as net capability for resource planning purposes. Transmission and Distribution Lines and Agreements The Company owns or has significant ownership interests in four 345 kv transmission lines in New Mexico, three 500 kv lines in Arizona, and owns the transmission and distribution network within its New Mexico and Texas retail service area and operates these facilities under franchise agreements with various municipalities. The Company is also a party to various transmission and power exchange agreements that, together with its owned transmission lines, enable the Company to deliver its energy entitlements from its remote generation sources at Palo Verde and Four Corners to its service area. Pursuant to standards established by the North American Electric Reliability Corporation and the Western Electricity Coordinating Council, the Company operates its transmission system in a way that allows it to maintain system integrity in the event that any one of these transmission lines is out of service. In addition to the transmission and distribution lines within our service territory, the Company's transmission network and associated substations include the following: Line Length (miles) Voltage (kv) 3 Company Ownership Interest Springerville-Macho Springs-Luna-Diablo Line (1) % West Mesa-Arroyo Line (2) % Greenlee-Hidalgo-Luna-Newman Line (3) Greenlee-Hidalgo % Hidalgo-Luna % Luna-Newman % Eddy County-AMRAD Line (4) % Palo Verde Transmission Palo Verde-Westwing (5) % Palo Verde-Jojoba-Kyrene (6) % (1) Runs from TEP's Springerville Generating Plant near Springerville, Arizona, to the Company's Diablo Substation near Sunland Park, New Mexico. (2) Runs from PNM's West Mesa Substation located near Albuquerque, New Mexico, to the Company's Arroyo

19 Substation located near Las Cruces, New Mexico. (3) Runs from TEP's Greenlee Substation near Duncan, Arizona to the Newman Power Station. (4) Runs from the Company's and PNM's high voltage direct current terminal at the Eddy County Substation near Artesia, New Mexico to the AMRAD Substation near Oro Grande, New Mexico. (5) Represents two 45-mile, 500 kv lines running from Palo Verde to the Westwing Substation located northwest of Phoenix near Peoria, Arizona. (6) Runs from Palo Verde to the Jojoba Substation located near Gila Bend, Arizona, then to the Kyrene Substation located near Tempe, Arizona. Environmental Matters General. The Company is subject to extensive laws, regulations and permit requirements with respect to air, soil and water quality, waste management and disposal, natural resources and other environmental matters by federal, state, regional, tribal and local authorities. Failure to comply with such laws, regulations and requirements can result in actions by authorities or other third parties that might seek to impose on the Company administrative, civil and/or criminal penalties or other sanctions. In addition, releases of pollutants or contaminants into the environment can result in costly cleanup liabilities. These laws, regulations and requirements are subject to change through modification or reinterpretation, or the introduction of new laws and regulations and, as a result, the Company may face additional capital and operating costs to comply. Certain key environmental issues, laws and regulations facing the Company are described further below. Air Emissions. The U.S. Clean Air Act ("CAA"), associated regulations and comparable state laws and regulations relating to air emissions impose, among other obligations, limitations on pollutants generated during the Company's operations, including sulfur dioxide ("SO2"), particulate matter ("PM"), nitrogen oxides ("NOx") and mercury. Clean Air Interstate Rule/Cross State Air Pollution Rule. The U.S. Environmental Protection Agency's ("EPA") Clean Air Interstate Rule ("CAIR"), as applied to the Company, involves requirements to limit emissions of NOx and SO2 from certain of the Company's power plants in Texas and/or purchase allowances representing other parties' emissions reductions since While the U.S. Court of Appeals for the District of Columbia Circuit voided CAIR in 2008, such appellate court in August 2012 also vacated the EPA s proposed replacement, called the Cross-State Air Pollution Rule ( CSAPR ). The EPA is expected to propose a CSAPR replacement rule, which if finalized and upheld, would also replace CAIR. The timing and substance of any final CAIR replacement is currently unknown and until promulgated and upheld, the Company remains subject to CAIR. The annual reconciliation to comply with CAIR is due by March 31 of the following year.the Company has purchased allowances and expensed the following costs to meet its annual requirements (in thousands): Compliance Year Amount 2010 $ National Ambient Air Quality Standards. Under the CAA, the EPA sets National Ambient Air Quality Standards ("NAAQS") for six criteria emissions considered harmful to public health and the environment, including PM, NOx, carbon monoxide ("CO") and SO2. NAAQS must be reviewed by the EPA at five-year intervals. In 2010, the EPA strengthened the NAAQS for both NOx and SO2. In December 2012, the EPA strengthened the NAAQS for fine PM, and it is likely to propose more stringent ozone NAAQS in The Company continues to evaluate what impact these final and proposed NAAQS could have on its operations. If the Company is required to install additional equipment to control emissions at its facilities, the revised NAAQS could have a material impact on its operations and consolidated financial results. Utility MACT. The operation of coal-fired power plants, such as the Company's Four Corners plant, results in emissions of mercury and other air toxics. In December 2011, the EPA finalized Mercury and Air Toxics Standards (known as the "Utility MACT") for oil- and coal-fired power plants, which requires significant reductions in emissions of mercury and other air toxics. Several challenges are being made to this rule. These challenges notwithstanding, companies impacted by the new standards will have up to three (and some cases, four) years to comply. Information from the Four Corners plant operator, APS, indicates that APS believes Units 4 and 5 will require no additional modifications to achieve compliance with the Utility MACT standards; however, further testing and evaluation are planned. 4